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Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: rupert1 who wrote (55046)	3/29/1999 4:18:00 AM
From: rupert1	Respond to of 97611

she_x of the Yahoo Club applies for a job at The Register. Inside dope on Intel making boxes for CPQ and on restructuring. ____________________ You heard it here first she_xlr8s (44/F/TX) Mar 28 1999 11:01PM EST may 99 intel to build small/medium business boxes for compaq. i know i should write for the register now, huh? i don't make this stuff up folks, i just pass it along. no i don't know all the details. sounds pretty curious though. she CPQ restructuring not a rumor she_xlr8s (44/F/TX) Mar 29 1999 2:38AM EST it's a fact. lots of restructuring in division lines and manufacturing. straw wants to start pulling a lot of the outsourced manufacturing back in house. says his plan will be cost-cutting. also some changes in the channel BTO/CTO plans. sounds curious to me. is it possible they've found a way to cut the odds of ever stuffing the channel again? more layoffs too. as for intel building boxes for us, is it good news or bad? all i know is it's big news. not sure exactly what the C.C. tomorrow is about, probably the restructuring news. i don't think the intel deal will be announced yet. we'll see. she

To: rupert1 who wrote (55046)	3/29/1999 4:28:00 AM
From: Aitch	Read Replies (2) \| Respond to of 97611

victor, Something to chew on untill the rest of the thread shows up... CPQ: Channel Re-Engineering Limits Visibility; Maintaining Buy 07:41am EST 26-Mar-99 Bear Stearns (Andy Neff, Shaw Wu, William Bean) BEAR, STEARNS & CO. INC. EQUITY RESEARCH Compaq Computer (CPQ-31) - Buy Channel Re-Engineering Limits Visibility; Maintaining Buy ----------------------------------------------------------------- *** Channel Dislocation, Other Shortfalls. While the ongoing channel dislocation and consolidation in the U.S. is a necessary step to enhance efficiency, it also has the impact of reducing our visibility into near-term demand trends. * Seasonality Plus. While we believe that the personal computer industry is exhibiting seasonal demand patterns, which were exacerbated by anticipation of Pentium II price cuts, another major issue affecting demand is this restructuring of the channel in the U.S. * Channel Churning. As we have noted before, the channel - distributors and resellers - are facing tremendous pressures owing to the move by their major vendors - including Compaq, Hewlett-Packard and IBM - towards direct sales and the reduction of incentives paid to the channel. This turmoil is evidenced by recent earnings shortfalls at major distributors and resellers, such as Inacom (last night) as well as recent shortfalls or lowered guidance at Ingram Micro, Tech Data and other comparable companies. (Inacom highlighted some of these issues in its pre- announcement; it may discuss them further in a conference call scheduled for Friday (March 26) morning.) * Transitional Pains. We believe the channel and the indirect vendors are experiencing transition pains as the channel attempts to shift its business to more higher-margin value-added services and less low-end hardware distribution revenue while the indirect vendors focus on selling direct to compete with Dell. * Demand Appears On Track. Despite the soft demand in January and February noted by Compaq, it appears that demand is tracking to seasonal trends. Moreover, several vendors have commented that the month of March has seen a nice pick-up in momentum. We believe fundamental demand is still strong as (1) the Internet is still the biggest driver as corporations and individuals continue to spend on Internet clients and Internet infrastructure (servers, storage, networking, and software); (2) corporations continue to spend on IT to lower costs, improve productivity, and leverage off their information assets. ----------------------------------------------------------------- Shares outstanding: 1,750 million Market cap: $55.1 billion EARNINGS Q1 Q2 Q3 Q4 Mar Jun Sep Dec Year P/E Current 1999 $0.29E $0.35E $0.42E $0.60E $1.65E 19.1x Current 2000 $0.47E $0.52E $0.55E $0.71E $2.25E 14.0x ----------------------------------------------------------------- * Need for Channel Consolidation. We believe that it is in the long-term interest for channel companies to consolidate in order to restore profitability for themselves and their computer vendor partners. We think that the nearly $1 billion pre-tax loss by IBM in the PC business in 1998 confirms our belief that the current channel system is not working and very inefficient for today's needs. We believe there are still too many inefficiencies in the system and that many of the second and third-tier distributors need to combine. We have seen some consolidation - i.e. share consolidation and the merger of Inacom and Vanstar, however, we think there's still plenty of opportunity for further consolidation. The key question is how long will this consolidation take and what dislocation could it cause for vendors. * Quarter Looks on Track. Despite our near-term concerns regarding the channel dislocation, we believe Compaq's March quarter is on track with our expectations for 1Q99 of $0.29 vs. $0.01. It appears that the month of March has seen a nice pick- up in momentum giving us more confidence. * Gradual Shift To Direct. We believe that Compaq's longer- term agenda is to grow its direct business in order to eliminate Dell's fundamental advantage of not having to pay the channel a concession for fulfillment services. We believe Compaq will do this gradually as they do not want to worsen the current state in the channel and to help migrate channel revenues towards higher- margin value-added services. We expect to see further moves in this direction when Compaq CEO Eckhard Pfeiffer discusses its small business efforts on March 30. * No Change in Estimates. We are maintaining our 1999 estimate of $1.65 and our 2000 estimate of $2.25 as we believe CPQ is weathering short-term issues that will be fixed by next year. *** Maintain Buy. Though we believe Compaq stock may be in the $30-$40 trading range in the near-term as Compaq fixes its channel issues and beefs up its direct effort, we believe Compaq shares have potential significant upside to the $55-$60 range in 12-18 months (based on 22-24x potential Year 2000 earnings power of $2.50) if Compaq can deliver on its goal on transforming itself from a box builder to a systems/solutions provider (implying an improvement in gross margins from mid-20s to 30% with operating expenses around 15%-17% of sales). The challenge at this point is focus and execution, but we think Compaq's management has demonstrated in its ability to overcome what have seemed like insurmountable odds in the past. We believe the process is in progress and think that this "bump in the road" could represent an opportunity.